Bouncing Back With the World's Greatest Investors

Four money managers who trounced the market during the crash and recovery explain how they did it, and tell us what stocks they're buying now.

By

DyanMachan

J.Alex Tarquinio

History and horizon. The challenge of investing is somehow to keep an eye on each: to read the often-shrouded lessons of markets gone by while simultaneously sharpening one's focus on the opportunities that lie ahead. One eye on the past, the other on the future -- it's a wonder any investor can walk at all. And yet the great ones not only walk, they fly. With that in mind, each year at this time SmartMoney reporters go through a ritual of sorts: staring out the windows of the magazine's Manhattan offices in search of any pin-striped figures soaring across the skyline. And this year, moreover, we added one more challenge to the effort: finding those who had managed to stay airborne in the tumult of the crash and recovery.

That, indeed, was a bar few could meet: Among the cast of headliner investors, hardly anyone -- not even the bespectacled Nebraskan who almost always makes our list (sorry, Warren) -- thrived in the crucible of the past three years. Hardly anyone, sure. But these four fund managers did. Over the same stretch, this group of steady fliers posted an average total return of more than 13 percent, outpacing the S&P 500 by 10 percentage points -- with each following a strategy well-made for these strange and unforgiving times. We think that's an achievement worth singling out. Here now, the World's Greatest Investors of 2011 -- and what they see on the horizon.

Bill Nygren

Bill Nygren, 52, always wanted to be a portfolio manager. For a college project at the University of Minnesota, he told his classmates that he would raise $25 million for his proposed mutual fund. "I was laughed out of the room," he says. That early focus, though, no doubt helped draw the $7 billion in assets he manages in three mutual funds for Chicago's Harris Associates. And that focus may have something to do with the performance of the Oakmark fund, which has earned a 10-year annualized return of 4.8 percent, 2.5 percentage points ahead of the S&P 500 for that time period -- a record that puts Nygren's fund in the top 10 percent of the more than 800 large-cap "blended funds" (those that invest in both growth and value stocks) tracked by Morningstar. Nygren, says Louis Simpson, another famous stock picker who now runs the hedge fund SQ Advisors in Naples, Fla., "is a disciplined investor on price and extremely knowledgeable about companies."

As for discipline, that became clear during the Internet bubble of the late 1990s: Nygren refused to get caught up in the hype even when the blistering performance of Nasdaq's then-dazzling dot-coms was causing him to feel the heat. One broker threatened to sell his fund shares unless Nygren joined the frenzy along with everyone else. Nygren held the line. Of course, certainty cuts both ways: Nygren was pilloried for clinging to Washington Mutual even as the bank was flushed into receivership amid the whirling chaos of 2008. "He stuck with WaMu longer than he should have," reflects Simpson. Nygren agrees. Indeed, that big-swing strike contributed to Oakmark's 4 percent loss in 2007, and to a more dismal drop of 36 percent in 2008. Even so, Nygren, who comanages Oakmark with Kevin Grant, kept to his disciplined buying. Picking up beaten-down media stocks like Liberty Interactive and DirecTV helped fuel a solid comeback over the past two years. Oakmark is up 69 percent since the start of 2009, versus 38 percent for the broader market.

With the past year's rollicking recovery in stocks, it may come as a surprise that Nygren still feels wildly upbeat about where the market is going, predicting rises of nearly 10 percent annually for the next decade. "The bears are missing the strength of corporate balance sheets," says Nygren, who points out that the level of cash kept by companies after paying dividends has been on the upswing.

Sitting behind his desk in his Chicago office, the fund manager relates a recent exchange with a shareholder that sums up his investing philosophy: "Most people are soured on technology stocks," the man began, a bit huffily. "Why do you own them?" Nygren took no time in his reply: "You answered your own question."

The insurer, which draws most of its income from Japan, has been punished too harshly by the stock market in the wake of the recent nuclear catastrophe there.

Thyra Zerhusen

"I can't help it -- I speak out," says Thyra Zerhusen, who admits she was once let go from an analyst job for insubordination. "I must have touched a nerve," she says sheepishly. But the German- and Swiss-educated money manager doesn't have to worry so much about pleasing the boss lately; she started her own firm in April.

Chicago-based Fairpointe Capital, of which she is the major shareholder, is now the official advisory firm for the midcap stock fund that she has managed since 1999.

Money managers, it turns out, aren't paid to win congeniality awards; they're paid to pick stocks. And her dogged research and watchful eye on risk have clearly benefited her shareholders: The fund's 13 percent annualized return during her tenure tops that of the S&P 500 by roughly 11 percentage points. As a rule, Zerhusen maintains a concentrated portfolio of around 40 stocks, many of which she'll hold for years. "Even when people around the table disagree, she doesn't waver," says Paula Alex, chief executive of the Advertising Educational Foundation, a separately managed client for nine years. And quite often, as her long-term record suggests, that conviction has paid off. Zerhusen, for instance, began loading up on shares of auto-supply company BorgWarner in 2002, when the stock was trading for less than $10 -- a pick Stuart Bilton, chief executive of Chicago's Aston Asset Management, who has worked with Zerhusen for years, admits he thought was crazy. The stock recently hit $80 a share.

Then again, Zerhusen's own über-confidence has left her with a few major clunkers along the way. Take, for example, her bet on Unisys, an information-technology company whose shares have languished for over a decade; Zerhusen's holding has lost some $280 million in value since 2002. "It's been really painful," she admits, while insisting that she has no plans to give up on the stock. (A Unisys spokesperson says the company's debt level and operating earnings have both improved dramatically.) Zerhusen's tenacity, combined with a relatively small number of holdings, can also result in a few skittish periods for short-term shareholders. (In 2008, Fairpointe Mid Cap was down 42.8 percent, six percentage points below the broader index.) But if dollars tell the story, there are plenty of investors willing to wait out the rough patches: Fund assets during Zerhusen's watch have grown from $20 million to over $3 billion.

Along with her long-term success has come -- no surprise -- a little fame. Flipping through a German-language magazine at an airport recently, she was amused to see a photo of herself next to those of the pope and a fashion model. She laughed, then put it back on the stand. At $9, the imported magazine cost more than she was willing to pay.

Shares of this Cambridge, Mass., firm, which helps clients like Amazon.com and CNN improve video streaming over the Internet, are priced well below their value, she says.

Bruce Berkowitz

His fund's motto is "Ignore the crowd" -- and that's what Berkowitz does. As others fled insurer AIG in panic, he loaded up on shares.

On a recent afternoon in swanky Coral Gables, Fla., Bruce Berkowitz is holding court from the best corner table of his favorite Italian restaurant. His business partner and right-hand man, Charlie Fernandez, who is married to Berkowitz's cousin, sits across from him. One by one, waiters usher in the partners' business appointments. "I don't spend much time at the office," Berkowitz explains, preferring to conduct the business of his firm, Fairholme Capital Management, in a more casual setting.

By now, investors who have followed the man's meteoric rise during the past decade have probably figured out that he doesn't stick to the fund industry's playbook. How else to account for Fairholme fund's 11 percent average annual gain in a 10-year span when the broad market barely made it back to even? His fund company's motto is "Ignore the crowd," and that's exactly what Berkowitz does. In the depths of the financial crisis, he helped bail out the American International Group and became AIG's second-largest shareholder after Uncle Sam. Then, when the government sold part of its stake earlier this year, Berkowitz plowed an additional $1.5 billion into the stock, doubling Fairholme fund's position.

As for diversification -- heck, that's for sissies, says the 53-year-old Berkowitz. His fund generally holds around 20 stocks, because he wants the stakes to be large enough that he can have sway with management. In that regard, experts say, he acts more like the manager of a hedge fund than like that of a typical mutual fund. Yet this son of a Boston taxicab driver wants to keep his funds available to the average joe. "I like the idea of giving everybody an equal shake," he says, in a Boston accent unwilted by Miami's heat.

A few critics contend that his infatuation with one stock or another can become a distraction -- leading the manager to spend too much time on a smaller holding in the $18 billion portfolio. Witness his seeming preoccupation with St. Joe, a Florida land developer. (Fairholme now owns 30 percent of the company, and Berkowitz recently became the chairman of the board.) Berkowitz, though, isn't swayed by his critics in the least; he believes that St. Joe, which back in the 1930s operated as a conglomerate with railroads and a paper mill, can build businesses that complement the company's real estate holdings.

But then, all-in bets are just part of his style. Recently, in fact, the man embarked on one of his most audacious moves yet -- rejiggering his fund's holdings to focus on some of the other wounded giants of the financial crisis, including Bank of America and Citigroup. Says Berkowitz: "We are in the last quarter of the banks building Fort Knox balance sheets."

The land developer owns half a million acres of mostly undeveloped property in the Florida panhandle; a new airport in the area, says Berkowitz, should spur regional growth.

Corrections & AmplificationsIn the original version of this story, we incorrectly said Fairholme fund owns shares in Wells Fargo. It does not.

Will Danoff

Will Danoff is no fan of the paperless office. On most days, the rumpled money manager sits nearly buried in clutter in his 11th-floor Boston suite. But amid the myriad analyst reports, company financials and newspaper clippings surrounding him, there is one item Danoff can always find: a tattered, wire-bound notebook holding tidbits of data from virtually every company he has met with since becoming manager of the $80 billion Contrafund over two decades ago. It is a simple reckoning of handwritten tickers, some five new entries a day, recording the pilgrimage of corporate executives to the world's largest fund firm. How does Danoff choose whom to see? "I like it when I am the only fund manager in the room," he says.

This go-it-alone attitude is the essence of contrarian investing, which has defined the Contrafund since it was founded in 1967. The fund's first two skippers piloted it successfully through the doldrums of the 1970s. Then four consecutive managers failed to achieve traction in the '80s. When Danoff took the helm in 1990, the fund's assets were a mere $300 million. The shareholders who stuck with him have been richly rewarded. A $10,000 investment 20 years ago would be worth nearly $100,000 today, almost double the return of Standard & Poor's 500 index. Danoff trounced the broader market by ignoring some hot trends during periods of euphoria and by pulling in his horns at the first sign of a chill.

Perhaps a cautious attitude comes naturally to the son of a pediatrician and a kindergarten teacher. When stocks began to implode in the fall of 2008, Danoff hoarded cash. By March 2009, around 13 percent of the fund was liquid -- a proportion that was notably high for Contrafund. Though he had largely steered clear of Internet stocks during the dot-com boom, Danoff surprised himself by buying Apple and Google -- a pair of galloping giants that have since become the largest positions in the portfolio. Still, he faults himself for not going even more aggressively into stocks at the time. Says the 51-year-old manager: "I should have known that if Google and Apple looked cheap to me, then the whole market must be cheap." Indeed, he says he held too much cash at the bottom of the bear market, which stunted the fund's performance. "I learned a lesson," he says.

As for the months ahead, Danoff predicts that they may be hazardous for investors. Since the market bottom in early 2009, the rising tide has lifted all stocks -- including some, he says, of companies that have "lousy fundamentals." So what's a company with solid fundamentals? Perhaps ironically, one run by another legendary investor: Warren Buffett. Berkshire Hathaway is among the largest holdings in Danoff's fund.

Despite the rough sailing of Berkshire stock in recent months, Danoff (whose fund owns the "A" shares) believes Warren Buffett's legendary holding company is still a great value.

* In accordance with Fidelity policy, Danoff won't name picks. The above are among the top holdings of his fund, as of the most recent filing.

Correction: In the version of this story that appears in the August issue of SmartMoney Magazine, the share price for China Pacific Insurance Group was misstated.

Correction: The Advertising Educational Foundation has been a separately managed client of Thyra Zerhusen's for nine years. The name of the organization and its tenure as a Zerhusen client was misstated in an earlier version of this story. Also, the acquisition referred to regarding Boston Scientific happened in 2006, not 2008.

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